I wonder how many people have read as far as the long-term projections at the end of the OECD’s Economic Outlook. Ed Conway was one of the few to comment on them and he noticed a “whopping slab of good news for Britain”. The OECD forecasts an average growth rate of 2.6 percent for the period between 2018 and 2030. That would make Britain the boomiest country in the G7. I say boom but actually it’s only a return to the sort of growth we used to think of as normal. Set against the background of the previous decade, though, it will be a good enough reason to throw a party.

The reasons for the UK’s growth, says Conway, are its flexible labour market and its relatively high birth rate. People will no doubt praise Margaret Thatcher for the former but will they thank Tony Blair for the latter? After all, he let in all those pesky immigrants and they are the ones doing the most to push up the country’s birth rate.

Wherever the praise or blame goes, Britain will not face demographic problems on quite the same scale as some other advanced economies and, as a result, says the OECD, our economy will steam ahead of the others in the G7.

Annual real GDP growth, G7 countries

2012-2030

Real GDP Growth

2012 – 2017

Real GDP Growth

2018 – 2030

Canada

2.0

2.2

France

1.6

2.3

Germany

1.1

0.9

Japan

1.2

1.1

Italy

0.3

2.0

United Kingdom

1.8

2.6

United States

2.5

2.1

So everything’s going to be OK then is it?

Well, not quite. (I hear a general sigh: ‘Trust Rick to find the cloud wrapped around the silver lining.’)

The OECD also predicts that Britain’s debt will be the second highest in the G7 by 2020 and the second highest in the OECD by 2030. (Second to Japan, of course, which almost goes without saying.)

If I extend the graph I did in the previous post up to 2030, the results are startling.

This implies that, until the end of this decade, the UK will add to its debt at a faster rate than its economy grows. In other words, public spending will continue to outstrip revenue and the government will be forced to run a deficit. After that, the reduction in the debt-to GDP will still be relatively slow, even with the fastest growing GDP in the G7, suggesting that the UK government will continue to run a deficit for some time.

The grimness of these figures must surely be conclusive proof that few journalists have read to the back of the OECD report. As far as I can tell, there have been no ‘Britain to have higher debt than Italy by 2020’ headlines from the Britain-is-Bankrupt brigade.

I must say I’m slightly surprised by these projections. We know that our economy has taken a huge hit from the financial crisis and that, as a result, Britain has been running a higher deficit than most OECD countries. Even so, with an economy growing faster than most, you would expect the rising tax revenues to reduce this and the increase in GDP to bring our debt-to-GDP ratio down a lot faster. How can countries like Italy, which start with higher debts and have lower growth, bring those debt levels down so much more quickly than the UK? I can’t find anything in the OECD commentary to explain this but I’d welcome your thoughts.

If the OECD is even half-right, though, it will make the next couple of elections interesting. It is starting to look very much as though the next election might be a good one to lose. Weak growth, rising debt and some horrid tax and public spending decisions are not going to make the next government popular. It’s not hard to imagine the taunts: “This, from the prime minister who saw our debt overtake Italy’s….!”

The election after that might be a good one to win though. The pick up in growth will probably come too late to save the 2015 government’s bacon but whoever is elected in 2020 will reap the rewards. Growth will be strong or, at least, back to normal and the debt-to-GDP ratio will, at last, be coming down. The new prime minister could ride in on a new wave of growth and optimism. I expect some politicians are already scheming for such a scenario. The 2020 government will still face tough fiscal choices, of course, but dealing with such problems during a time of growth will be that bit easier. Whoever wins in 2020 could be well placed for 2025 too.

13 Responses to When the roses bloom again

I know I’ve wheeled this one out before, but William Hague’s words from last year on some aspects of the intended legacy of the current Coalition Government are very pertinent to your closing paragraphs here:

“[W]e are recreating the work ethic for everybody in Britain. I think that these reforms will be seen in the 2020’s as being as important to this country as the trade Union reforms and privatisations were of the 1980s. This is as fundamental as that. This is the purpose of the Coalition Government.”

Not a chance! Not one chance in 1000 that we’ll see 2.6% annual growth – never again.
You see – WE’VE NEVER HAD IT. All that happened was that debt and population both exploded, so annual consumption rose – causing GDP to rise.
For the rest of our lifetimes, both the State and personal debt will fall – the former because of necessity and the latter because of prudence and the imminent collapse in house prices (outside London) as sanity returns to the housing market as planning laws are abolished (the only way to get the houses built of the quantity, quality and in the location that people want to live in).

Once a typical semi costs no more than £60,000, we’ll be able to stop sending much of our salary to the banks (who were able to pay vast Corp Tax as a result – no wonder the Treasury wants yet another house price bubble) and start saving before we buy.

Our balance of payments is absurdly imbalanced and clearly that, along with the Welfare State is completely unsustainable.

So,not 2.6% annual GDP growth, but 0.6% – with all that that imp[lies for State spending (cut by 50% or so); personal spending (reduced, as saving becomes fashionable) and immigration (becomes negative, as almost all Welfare payments and entitlements are ended unless a decade of NI has been paid)

“How can countries like Italy, which start with higher debts and have lower growth, bring those debt levels down so much more quickly than the UK? I can’t find anything in the OECD commentary to explain this but I’d welcome your thoughts.”

So this is a report, published in 2013, claiming to tell us what will happen between 2018 and 2030. I can’t decide whether that is brave or foolish.

As I recall, Lehman Brothers blew themselves up in 2007, becoming the trigger for all the subsequent economic problems. Therefore, if we retrieved an equivalent report to this one, the one that was published in, say, 2005, would we find an accurate account of our recent economic history starting in 2010 and stretching out to 2022? In particular, would a document written at the height of the debt-fueled boom, contain debt and GDP projections that correspond to what we have seen over the last three years? Even funnier is to consider the 2030 end of these forecasts. What would the OECD’s 1996 forecast for 2001 – 2013 look like when compared to recent history?

The people you really want to listen to are the ones who made forecasts for the 2010 – 2015 period back in the 2005-ish era, and who have since been proved right. I’m guessing that’s not the OECD.

I think you may have slightly pre-empted my response below, but I won’t let that stop me.

“I just wonder what their thinking is on this.”

In my experience there are three kinds of forecasts. The first kind just project current trends out into the future and usually end with “… and a catastrophe ensues”, eg extinction from below replacement rate fertility or whatever. No one really believes these forecasts but they can serve a useful purpose as a wake up call.
The second kind is typified by the Met Office. They have very sophisticated mathematical models and a ruthless commitment to comparing last week’s forecast to this week’s outcome so as to further improve their models.
The third kind involves making some assumptions about what might happen (so they aren’t in the first category) and then projecting the future again. This can look a bit like the Met Office, except that the assumptions are usually chosen to get whatever result the authors want and there is never any review of previous forecast attempts to improve the process.

The third case fits somewhat with your observation below about the OECD “just being PC”. If they have taken care to choose assumptions that give the result they want, then that could explain your difficulty following their thinking – you don’t share their self-serving choice of assumptions.

This is why I brought up the issue of how the forecasts they made in the past compared with subsequent actual events. If they had a history of being right much of the time then they are worth listening to – even when their predictions seem strange. If not, then what does it matter what they say?

I think the answer to your question (“How can countries like Italy, which start with higher debts and have lower growth, bring those debt levels down so much more quickly than the UK?”) is to be found on pages 209-11 of the OECD report). Italy went into the crisis with an underlying primary surplus and has front-loaded “consolidation” (i.e. cuts). The countries with the biggest stretch are Greece, Portugal the UK and the US, but of these four, the UK has achieved least in terms of front-loading, hence the slower pace of reduction in the debt-to-GDP ratio after 2014.

The chart above is premised on a belief that countries should aim for a ratio of 60%, and that they will achieve this at a steady rate relative to their primary balance in 2014. The UK’s slower trend reflects the fact that the Coalition have not improved the primary balance (i.e. the gross annual deficit before interest), which in turn reflects the fall in tax revenues since 2010 and the minimal fiscal impact of public expenditure cuts to date due to automatic stabilisers. One could also note that the underlying primary balance pre-2008 was relatively high due to public sector investment in the mid-00s.

In a nutshell, the OECD appear to view UK public debt as particulalrly “sticky”. This will no doubt be interpreted as justification for a further “revolution” in public sector financing, so expect more doom-mongering on pensions, health and social care.

Thanks for this Dave. You’ve helped me clarify what was bugging me about all this.

I get the point about primary balances and that Italy had already reduced its deficit. What I find harder to accept is that countries with similar (or worse) demographic problems to the UK but lower growth, higher historic debt and endemic tax evasion can maintain such low deficits relative to the UK.

I wonder if the OECD is just being PC in saying that all Eurozone countries will achieve the Fiscal Compact targets by 2030. The Eurozone lines on the graph do merge at a convenient point in 2030. I’m not convinced that they will all be able to do this.